Sell Stocks in May and Go Away? April 30, 2007

About a week ago, I wrote a post entitled “Stock Market Timing: Resisting the Urge” where I expressed some inclination to lock up some the solid gains we have experienced during recent months in anticipation of some more volatility and downside in the months to come.

Interestingly, just today I read an article from CNN Money entitled “Sell in May and Walk Away? Not So Fast” that really got me to thinking about whether or not I should go ahead and act on my intuition. Fortunately, because of the timing, there were a number of articles on the same topic from various sources. As you might expect, the advice ran the spectrum from giving credence to the effect and how to take advantage while others considered it “nonsense”.

One item in particular caught my attention and that was a paper called “The Halloween Indicator, ‘Sell in May and Go Away': Another Puzzle” (link is to abstract, you can download document from the site). As you might expect from such papers, it is a bit of a dry read, but essentially uses a statistical approach to test the hypothesis of whether or not the effect is statistically significant (ie – returns are indeed lower during the May-October period versus the rest of the year). You can read it for yourself, but the results indicated the answer was -yes.

Based upon the various articles on the topic, the paper above, and the thoughts I had shared in my earlier post, I decided that I would in fact go ahead and act upon this information. However, one could easily question the strength of my conviction as I have opted to take what I feel is a “middle of the road approach”:

I am not exiting equities entirely, but rather will reduce my overall risk by reducing my positions in select investments (mostly international funds)

I am not creating a “cash” position in the literal sense (not converting my investments to a money market for example), but am doing it by proxy in that the major shift in my allocation will be to a fund with a good chunk in cash (Capital Appreciation).

More specifically, I have made the following changes (all are approximations since I don’t yet know the results of today’s market close):

PIEQX (Int’l Equity – Europe focus) – reduced from 18.5% to about 10%

PRMSX (Emerging Markets) – reduced from 8.9% to about 4%

PRFGX (Growth) – reduced from 12.9% to about 7%

PRFDX (Equity Income) – reduced from 12% to 10%

PRSVX (Small Value) – reduced from 11% to 10%

TRMCX (Mid Value) – very small reduction from 8.5% to 8%

PREMX (Emerging Bond) – increased from 2.9% to 5%

PRWCX (Capital Apprecation) – increased from 9% to 30%

For some of the smaller items, I’m sure you’re wondering “why bother?”. These were more or less tweaks to get the overall allocations looking like I wanted them to. After the markets close and I can really see the numbers, I’ll see if any adjustments need to be made…although I’m not really anticipating any.

Essentially, I have moved about 25% of my investments to what I feel are less risky funds that will not suffer as badly in the event of a correction over the coming months. While this approach does not insulate me from the effects of the market, it should at least give it a good tilt to the more conservative side.

So, what next? Historically, given my age, I like to be very much invested in stocks according the allocations I had prior to this most recent change that would be more consistent with my longer term goals. However, in the intermediate term, I’d like to see if this shift will create more room for me to take advantage of any significant dips that may happen during the summer. Although I hate the thought of it, I guess I’m doing a bit of market timing. I know this is supposed to be a bad approach, but obviously I feel strong enough about the prospects over the coming months to act on it and see how things pan out. Ideally, I would hope to see a considerable drop in the next couple of months (ex: similar in scope to the recent slide in Feb or last year’s summer correction in June) whereby I would then re-invest in those assets at the lower price.

Will this happen? Of course, I’m not omnipotent and have no idea. Like I said, based upon the information I have, I’m willing to give it a go (because I think there’s a better than even chance it will). At worst, I’ll give up some (but not all) of any gains. At best, I will suffer some (but not all) any correction and be able to reinvest with the potential for greater long term gains in the future.

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